The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth -II

Below, Corrections depicts two uses of the Index of Economic Freedom.  In this version, we have added some countries that were previously missing due to heterogeneous naming of country names, and use yearly data, and we depict the data points associated with the U.S. separately from other countries. We combine the IEF with the Penn World Tables, the last of which is available in 2010, giving yearly data for most countries from 1995-2010.  The first figure (click to enlarge) looks at the GDP growth rate (rather than the level growth rate) by the change in economic freedom.  For those curious, the largest GDP/capita growth rate is that of Afghanistan between 2001 and 2002, for obvious reasons.  Iraq between 2003 and 2004 has a similar jump.

The second figure first regresses growth on size, and plots residual growth against the change in IEF (click to enlarge).

Does the Federal Reserve Cause Growth? Apparently!

Hating on the Federal Reserve is a religion.  Among the falsities that will be claimed is that the United States grew faster when the Federal Reserve did not exist than when it has.

This is an unusual claim, as U.S. NIPA accounts only started in 1934 (retroactive to 1929), and the Federal Reserve came into being in late 1913/early 1914.  Indeed, the only widely used statistics Corrections is familiar with, Christine Romer's data extending back to the 1870's, still make a comparison difficult (and, we conjecture, will bear out the Federal Reserve).

In any case, we can use the late Angus Maddison's historical data to look at the geometric average of GDP/capita growth in constant Geary-Khamis dollars from 1800-1914, and from 1914 to 2010, the last (and first) year the data is contiguously available.

As one might rationally expect, the results don't bear out the Fed haters:  from 1800-1914, the geometric average growth rate is 1.15% per capita in real terms.  From 1914 to 2010, the geometric average growth rate is 1.95% per capita in real terms (the common "2%" number often claimed).

Note that Corrections is willing to bet that actual GDP growth (rather than GDP per capita growth) was faster in the 1800's than in the 1900's, ironically due to the massive waves of immigration, an actual cause of growth that conservatives want to kill off due to largely unstated, unsubstantiated, or untestable claims.

This shouldn't convince anyone, nor does Corrections expect it will.  It's a terrible comparison to make, with little to no information contained in the statistics.  That said, this allows for a double indictment of the argument.

The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth

The Index of Economic Freedom is correlated with GDP/capita.  Whatever our qualms about the Index's creation (it is fatally flawed), the manner in which it is almost always cited is wrong.  Not only is the instrument useless, but the traditional conclusions made with it are logically fallacious.

Corrections notes that in order for the Index of Economic Freedom to be useful in discussing growth, changes in the index should correlate with changes in GDP per capita growth.  Below, we take the difference in the rankings for the IEF and plot them against the difference in GDP per capita in Geary-Khamis dollars (PPP) (click to enlarge).  96 countries have data in both the Penn World Tables and IEF in 1995 and 2010.

The fit is so poor that a traditional OLS regression finds IEF on real per capita GDP change is worse than chance (it explains less of the variance than the average totally random sample would).  

Revisiting Educational Hiring

Earlier this year, in May, the New York Times ran the article "Teachers Facing Weakest Market in Years" (May 19th, 2010). The article claimed that

Even upscale suburban districts are preparing for huge levels of layoffs. School officials and union leaders estimate that more than 150,000 teachers nationwide could lose their jobs next year, far more than any other time, including the last major financial crisis of the 1970s.

Corrections suggested this was nonsense, that the comparison was faulty, and that the Times only offered anecdotal evidence. A commenter, Student1776, suggested that, given there was little evidence for writing an article about how poorly teachers were faring, the Times might have ulterior motives.

Here, Corrections offers a bayesian update on that hypothesis. The summer was not unkind to educational occupations. Below, we offer the residual of HP filtered, deseasonalized educational hiring and separations ("taking out" the long-run business cycle variation and homogeneous monthly effects).  This image indicates to Corrections that teacher separations (including quits) have not suffered much during the recession (click to enlarge).

For those unfamiliar, Hodrick-Prescott Filtering ("HP filtering") is a way of separating business-cycle frequencies from time-series data.  For those interested, we can graph GDP and HP filtered GDP from the first quarter of 1947 to the third quarter of 2010, in billions of chained 2005 dollars (click to enlarge):

For visual purposes, we can zoom in on the first quarter of 1980 to the third quarter of 2010, to help understand the severity of the recent recession (click to enlarge):

 Finally, it is important to note that while deviations from business cycle trends look like quarterly GDP growth, they aren't.   For better understanding, we offer a graph of recessions from 1947:Q1 to 2010:Q3 and deviations from HP filtered GDP in billions of 2005 dollars (click to enlarge).

Hopefully, this brief introduction to the HP filter makes clear that our extraction of business cycle trends are not taking out the phantom educational job loss claimed by the New York Times.  This job loss does not appear to exist on either the hiring or separation margin, unless one's loss function is as biased toward finding teachers in trouble as the one used by the New York Times.

No, They're Not a 'Hitler' or a 'Stalin'

New York Times article "No, They're Not a 'Hitler' or a Stalin'" (November 16th, 2010) offers a complete misreading of Russian history leading up to the Second Congress of Soviets following the October Revolution of 1917.

Communism has never once arisen — not in the U.S.S.R., not in China, not in Cambodia, not in Cuba, not in Vietnam, not in North Korea — as the cumulative result of social reforms. It was always brought by violent revolution carried out by a fanatical minority, usually during or right after war. Once in power, committed revolutionaries sought to transform agrarian countries such as Russia or China into modern industrial states by oppressing peasants and applying political terror.

This is not true. The lead-up to the Russian Revolution was 56 years in the making, seeing a series of social reforms brought on by both violent extremists and political reforms. In the period between the Peasant Reform of 1861 and the October Revolution, Russia saw the freeing of the serfs, an overhaul of the penal code and judicial system, the creation of the Duma, the legalization of trade unions, organization of political parties, and the creation of local elective bodies with their own taxation rights. To be sure, Russia also saw anti-liberal reforms, but this strengthens the point that this period of great social reform lead directly to the Revolution of 1905, which in turn found its new steady state after the February and October Revolutions of 1917.

The claim that Communism did not result from "cumulative reforms" is a fallacy. Cumulative reforms certainly co-moved with increasing instability in Russia over the course of a half century, leading to the first Communist government, enabling it to kill tens of millions of people until its fall in 1991.

A Best Seller as 4 Films Tied Together With Talk

New York Times movie review "A Best Seller as 4 Films Tied Together With Talk" (September 30th, 2010) concerning the Freakonomics movie is in error in its report on an experiment in public high schools run by John List and Steven Levitt. It gets the payment method wrong in multiple ways.

The Grady-Ewing vignette, filmed in a vérité style, follows an experiment in which ninth graders at a Chicago high school were paid to improve their grades: $50 for every grade above a C and the chance to win a $500 lottery.

To qualify for payment, all students had to have all grades be C or higher, no in-school or out-of-school suspensions, and no more than one unexcused absence. If they qualified, 50% would be paid $50. The other 50% would be given a 10% chance at $500. Further, for 50% of either group, the parents would be paid. For the other, the students would be paid. (That is, there were four treatment groups and a control).

The Times gets the threshold wrong, eschews the payment of parents, and gets the payment doubly wrong.

Why California should just say no to Prop. 19

LA Times OpEd "Why California should just say no to Prop. 19" (August 25th, 2010) deceives readers.

A 2004 meta-analysis published in the journal Drug and Alcohol Review of studies conducted in several localities showed that between 4% and 14% of drivers who sustained injuries or died in traffic accidents tested positive for delta-9-tetrahydrocannabinol, or THC, the active ingredient in marijuana. Because marijuana negatively affects drivers' judgment, motor skills and reaction time, it stands to reason that legalizing marijuana would lead to more accidents and fatalities involving drivers under its influence.

The meta-analysis the article mentions is called "A review of drug use and driving: epidemiology, impairment, risk factors and risk perceptions" in the Drug and Alcohol Review Volume 23, Issue 3 by Erin Kelly, Shane Darke and Joanne Ross, and is available here (gated). The analysis notes explicitly that, "There is inconsistent evidence regarding the impairing effects of cannabis in field studies." It lists four field studies and notes that three of them indicate no significant impact of cannabis consumption on driving. The article concludes, "the relationship between between THC and street driving performance is equivocal." Any reader inclined towards believing what the data is telling them, rather than what they wish they could find, would conclude not that "legalizing marijuana would lead to more accidents and fatalities involving drivers under its influence", as the LA Times piece has, but rather that we shouldn't expect legalizing marijuana to change the number of accidents and fatalities. The OpEd's conclusion is ridiculous and unsupported by the evidence they themselves cite.

In addition the the egregious error discussed above, the article also provides readers with a foolish analysis of negative externalities.

The current healthcare and criminal justice costs associated with alcohol and tobacco far surpass the tax revenue they generate, and very little of the taxes collected on these substances is contributed to offsetting their substantial social and health costs. For every dollar society collects in taxes on alcohol, for example, we end up spending eight more in social costs. That is hardly a recipe for fiscal health.

This analysis implies that the pleasure people get from drinking is worthless. Drinkers and non-drinkers alike deserve to have their utility taken into account when analyzing the costs and benefits of a liquor tax. Basic economic theory would tell us that social surplus is maximized when the marginal social cost of drinking equals the marginal social benefit of drinking. If we are counting drinkers as members of society, then it follows that some level of drinking is optimal. The figure below demonstrates how a pigouvian tax allows us to arrive at the optimal social level of alcohol consumption (click here to enlarge).

In equilibrium, the level of the tax just measures the difference between marginal private cost (cost of drinking to drinkers) and marginal social cost (cost of drinking to society, including alcohol-related externalities). Taxes on goods with externalities are meant to regulate consumption to socially optimal levels. As in the figure above, it is possible to draw social and private cost curves that yield the result discussed in the article--tax revenue is one eighth the area between social cost and private cost curves. The red shaded area represents the tax revenue and the blue shaded area represents the difference between social and private cost. This is a socially optimal (but not necessarily revenue maximizing) tax.

Free That Tenor Sax

New York Times editorial "Free That Tenor Sax" (August 21st, 2010) espouses a shift in U.S. copyright law. Specifically, it advocates shortening the copyright law to only protect a work during an author's life, rather than an author's life plus seventy years.

Copyright laws are designed to ensure that authors and performers receive compensation for their labors without fear of theft and to encourage them to continue their work. The laws are not intended to provide income for generations of an author’s heirs, particularly at the cost of keeping works of art out of the public’s reach.

Corrections should first note the patent falsity of this statement. The law protects a work for an authors life plus seventy years. To argue that the law is only meant to protect a work during an author's life, but not past it, is the sort of socialist self-deception the New York Times editorial board has made a habit. The position of the Times is ludicrous.

But more important than this deliberate deception by the Times are the false economic implications behind its statement. The Times appears to believe that an author prefers monetary reward only during his lifetime. Authors are not so selfish as to only desire profits in their lifetime--they have dynastic preferences, and are altruistic towards their heirs.

When deciding how hard to work, authors care about the net present value of profits--that is, total profits over all time, discounted to the present period. In the current paradigm, we might suppose that profits look like this (click to enlarge):



The Times wishes to change this to a value-stream following this model: (click to enlarge):



If all authors care about is the shaded area, their total profits, then we can see why the Times idea serves as an assault on art--it helps corrode and shrink an artist's livelihood and joy from his work.

Yet the point Corrections is espousing holds even if authors didn't care about their children. All an author needs to gain the net present value of all future profits is to sell the continuing rights to his work before his death. In this manner, all that matters is the total profits an artist can make--he can obtain the net present value of his work's entire stream of profits currently by selling the work to another individual. Indeed, a work's copyright could span many generations and liquidation would still be possible.

What the Times is suggesting is to destroy a portion of the incentives that authors have to create their original works in return for a few works to be out-of-patent now. This is, in effect, a tax on the value of all author's works. If ever an organization was willing to kill the infinitely-lived goose for its golden egg, the New York Times is.

Indeed, we might note that because an author is a durable-goods monopolist that does not face the Coase Conjecture (gated) (not to be confused with the Coase Theorem), profits are further decreased that they would otherwise have been, because consumers are willing to put off their consumption during an author's lifetime when they know the end of copyright is near.

Thoroughly Modern Theodor

Jewish Daily Forward article "Thoroughly Modern Theodor" (April 21st, 2010) makes an untrue claim about women's suffrage in Europe. Specifically, it claims that Theodore Herzl gave women the vote in the First Zionist Conference in 1897, as compared to European countries, none of which, the article claims, gave women the vote in national elections.

Herzl gave women voting rights in 1897, when no European country permitted women’s suffrage in national elections.

First, women did not have the vote in the 1897 First Zionist Conference, but instead were given the right to vote in 1898, in the Second Zionist Conference. Second, in 1881, the Isle of Man gave women the right to vote in parlimentary (national) elections. Beyond comparing apples and oranges, the Forward's statement is twice factually incorrect.

Scary ‘IRS agents’ claims --- Truth comes out about the ‘16,500 thugs coming with their guns’ to jail insurance cheats

Chicago Tribune article "Scary ‘IRS agents’ claims --- Truth comes out about the ‘16,500 thugs coming with their guns’ to jail insurance cheats" (April 8th, 2010) misses the point in attacking Ron Paul's argument concerning IRS agents. Specifically, Representative Paul suggested that if one fails to pay one's taxes individuals with firearms will come to one's door and put one in jail. The Tribune thinks this is in error.

In an interview on the Fox Business Network, U.S. Rep. Ron Paul, R-Texas, conjured up this specter of "armed bureaucrats," then, in the spirit of vividness, turned them into "16,500 thugs coming with their guns and putting you in jail if you (don't) follow all the rules."

It's hard to know where to begin unpacking this claim.

First, IRS "bureaucrats" — auditors, agents and other enforcement personnel, are seldom armed.

To Corrections, Paul appears quite correct. While auditors, agents, and other enforcement personnel of the IRS may not be armed, failure to comply with their orders will result in armed law enforcement officers coming to one's door. Taxes come from political power, and political power, as Chairman Mao noted in Chapter 5 of his Little Red Book, grows out of the barrel of a gun. This is a fundamental distinction between government and other institutions, and one that Austrian Economists especially are not hesitant to make.

The Tribune's correction is in need of a correction. Paul is quite correct in what he is stating.

The 2010 Census and Latinos: What race are we?

Christian Science Monitor opinion editorial "The 2010 Census and Latinos: What race are we?" (April 6th, 2010) asks a simple question but fails to answer it. The author complains that various latino nationalities are not given their own categories.

It is Question 9 that has confused Hispanics. It asks one’s race, and the possible answers are White, Black, American Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, Native Hawaiian, and Samoan. Responders are allowed to check as many boxes as they like.

Excuse me, but when did nationalities like “Japanese” and “Korean” become a race?

To answer the author's question, "Japanese" has been a racial term in the U.S. Census since 1870. "Korean" was first used in 1930, but has been intermittent. "Chinese" has been on the Census since 1860. "Mexican" was used in 1930. The author's lack of information could have been easily corrected.